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Evaluating your investment portfolio

Personal Finance

In this article you will learn about

  • Importance of asset allocation
  • When you need to rebalance your portfolio
  • How you can rebalance your portfolio to maintain an ideal asset allocation

 Just the way an annual health check is to gauge the state of your health, the purpose of a portfolio check-up is to appraise that your investments are still in line with your goals, investment horizon, financial situation, and risk tolerance. If it is, great; if not, it’s time you need to make adjustments. The adjustments that you make to your portfolio are to bring it back to the ideal asset allocation that is specifically suitable to you. Asset allocation involves dividing your investment portfolio among different asset categories, such as stocks, bonds, and cash.

If you have not reviewed your portfolio for a while, there is a good chance that relative market performance of asset classes has changed the asset allocation with which you started investing for the goal. At such times, start by listing out the funds in your portfolio to analyse their performance against the benchmark and with respect to your overall portfolio. This analysis will give you a fair idea about the continued suitability of staying invested in the fund. If a fund has been continuously underperforming its benchmark and peers, you need to exit the fund and look for appropriate alternatives.

Portfolio review is also a good time to rebalance it. Portfolio rebalancing means; adjusting your portfolio holdings to maintain the ideal asset allocation you started off with when investing towards a financial goal. For example, if your asset allocation is 60% equities and 40% bonds. If stock prices go up, your allocation to them might rise to 70%. That means you have to sell some stocks to get back to your desired level. It is important to maintain your asset allocation because it keeps your tolerance for risk at the most comfortable level.

There are several triggers that call for rebalancing. One way is to review your investment portfolio once a year or more frequently if the financial goal falls in the short- and medium-term range. In case of long-term goals which are five years or later, you could review the allocation once every few years. The other way is to review your portfolio allocation when the asset allocation has drifted beyond your comfort level. For instance, a drift of 10% from your target allocation could be used as case for review and rebalancing initiated.

An advantage of using the SIP way to investing in mutual funds towards your financial goals is the flexibility it offers to alter your future investments to rebalance your asset allocation. Alternately, rebalancing involves selling a little of what has done well, and reinvesting elsewhere to help keep the portfolio on track to achieve its pre-determined objectives. Remember, asset allocation helps you reduce risk through diversification and in the long run it has proven to be one investment strategy that helps you achieve your financial goals.

Next steps

  1. Check the performance of funds in your portfolio
  2. Fix a strategy on when to review your portfolio
  3. Take action to reset allocation to original levels

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All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/redress complaints, visit pgimindiamf.com/IEID. This is an investor education and awareness initiative by PGIM India Mutual Fund. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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